Case: – Tata Motors Finance Solutions Limited v/s Naushad Khan c/o. Nazbul hoda Khan; Commercial arbitration petition (l) no.8654 of 2022
The above captioned case has brought clarity on the arbitrability of debts owed to financial institutions, particularly those covered under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) and the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (RDDB Act). The ruling of the Hon’ble Court establishes a crucial distinction between the two acts, highlighting their impact on the arbitration process.
The legal dispute arose from a financial arrangement between Tata Motors Finance Solutions Ltd (the Petitioner) and the respondents, involving loan facilities for vehicle acquisition. Initially, the Respondents adhered to the loan agreements, but defaults led to a dispute. The Petitioner invoked the arbitration clause in the agreements, leading to legal proceedings.
The Respondents argued that being a financial institution under the SARFAESI Act, the petitioner should resort to the Debt Recovery Tribunal (DRT), as arbitration was allegedly not a viable option. They emphasized the SARFAESI Act’s exclusivity, contending that arbitration was prohibited once the DRT avenue was available.
The Petitioner countered, asserting that its financial institution status under the SARFAESI Act did not extend to the RDDB Act. Furthermore, it argued that disputes related to debt determination, critical for arbitration, fell outside the SARFAESI Act’s scope.
The Hon’ble Court thus, in its judgement emphasized the specificity of the Petitioner’s financial institution status under the SARFAESI Act, clarifying that it did not extend to the RDDB Act. It highlighted the absence of provisions in the SARFAESI Act for the determination/crystallization of debt, making arbitration a legitimate avenue for such disputes.
The Hon’ble Court held that a debt owed to a financial institution solely covered under the SARFAESI Act is arbitrable. In contrast, a debt owed to a financial institution to which the provisions of the RDDB Act also apply is deemed non-arbitrable. The Court distinguished the acts, noting that the RDDB Act contains exhaustive provisions for debt determination and recovery, while the SARFAESI Act focuses solely on enforcement.
The Bombay High Court’s decision provides insightful analysis differentiating the two acts ensures clarity on the jurisdiction for resolving financial disputes involving these statutes. This ruling not only affirms the legitimacy of arbitration for specific cases but also underscores the need for a nuanced understanding of the legal framework governing financial disputes.
Author of this article:
Adv. Ravish Bhatt,
Partner, R&D Law Chambers,
Dual Qualified Lawyer Solicitor | International Tax Affiliate
Connect with Mr. Bhatt on Linkedin: https://www.linkedin.com/in/adit-ravishbhatt/
- Readers should contact their attorney to obtain advice with respect to any particular legal matter. No reader or user should act or refrain from acting on the basis of information written above without first seeking legal advice from qualified law practitioner.